The reforms, due to come into force in April next year, mean that non-UK domiciles who have resided in the country for more than 15 of the past 20 tax years will now automatically be deemed UK-domiciled.
According to the Financial Times, the UK Treasury is now planning to relax the original proposals on the taxation of offshore trusts where instead of taxing all of the future gains of a trust following a payout, capital gains would be taxed when there was a payment to a UK resident.
The change is the Treasury’s second alteration to the reforms – announced by former chancellor George Osborne in the 2015 budget – in recent months amid predictions by industry experts that his successor Philip Hammond could consider delaying their introduction.
In August, the Treasury said it was also looking to close the inheritance tax loopholes used by non-doms despite mounting criticism that the new system would drive away expat high net-worth individuals (HNWI) from the UK.
Earlier this month, British prime minister Theresa May slammed people who deemed themselves “global citizens” and advisers who helped people “avoid what they owe to society”.
Remittance tax basis
Under the current system, non-doms living in the UK can choose between paying UK tax on all overseas income and gains as and when the liability arises or they can choose to be taxed under the remittance basis – whereby they will only be taxed if the gain is brought to the UK. If they chose the remittance basis they have to pay a tiered remittance basis charge.
Those using the remittance basis are not liable to pay CGT in the UK on the sale of overseas assets such as offshore trusts.
As a result, the Treasury propsoals mean that from 6 April 2017 those newly deemed UK-domiciled would have to pay CGT on all future capital gains of the trust.
However, the proposed tweaks mean that all capital gains on overseas assets made after April next year will only be taxed if they are remitted back to the UK as a part of overseas income for that tax year.
‘Draconian’ rule
Chris Groves, partner at international law firm Withers, welcomed the possible changes to the “draconian” rule, explaining that it will make the non-dom reforms more “workable”.
“Previously, people were thinking ‘I can set up a trust but I can’t ever receive the capital out of it if I want to maintain its tax status’ but now you will be able to take a capital distribution without prejudicing the future status of the trust,” he told International Adviser.
He added that the UK is “very conscious of maintaining the UK as attractive place” for wealthy expats to come and settle.
IHT changes
Groves said that it’s likely the changes were in response to the Treasury’s second consultation paper, published in August and which closed last week, setting out plans to close inheritance tax (IHT) loopholes on properties held by non-domiciled residents in an offshore entity.
The government unveiled an extension to IHT charges which will see them apply to both individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled.
Calls for a delay
The government’s U-turn on offshore trusts comes just days after critics urged the government to postpone introducing the non-dom reforms, blasting the “impossibly short timeframe” in which to implement them.
On Friday, Nimesh Shah, partner at UK accountancy firm Blick Rothenberg, urged the government to delay the reforms until the “full effects of Brexit” are understood
“The non-domicile taxation regime has been a cornerstone of the UK’s tax legislation for decades and Britain’s attractiveness as an international center.
“The [UK] government should delay the current proposals so that the policy can be adjusted once it is clear what form Brexit will take,” said Shah at the time.
